Remarks by Commissioner Kevin J. Martin
20th Annual PLI/FCBA Telecom Conference
December 12, 2002
Washington, D.C.
“At the Crossroads”
Thank you, Dick, for that kind introduction. And thank you for
inviting me to speak at this annual conference. The PLI and FCBA serve the
communications bar so well with these informative sessions. I recall going
to this one in particular as a junior associate, and I still remember how much
I relied on the discussions and primers throughout much of the next year.
I’m not sure that what I’ll have to say today will be quite as educational as
some of the speakers I heard then, but I hope at least to keep your attention.
And perhaps I’ll even spark a healthy debate.
I. Deliberation to Decision-Making
As most of you know, the Commission has spent almost a year
collecting, reviewing, and discussing various policy proposals for local
competition and broadband service. These issues are of critical importance,
and certainly, a significant amount of time is needed to clearly think through
the complicated legal and policy issues at stake.
At some point, however, the Commission must move to wrap up the
debate and must start making the tough decisions. We must move from
deliberation to decision-making.
I believe we now are at the crossroads where choices must be
made. We have four critical rulemakings that have been pending since the
beginning of the year: the Triennial Review of unbundled network elements,
the dominant/nondominant proceeding, the wireline broadband NPRM, and
the cable modem service NPRM. The records are complete, we have
considered and debated the issues at length, and the proceedings are now
ripe for action.
Moreover, industry conditions cry out for answers. Companies are
struggling under too much debt, unable to recoup the past investments they
have made. Markets are valuing companies at depressed levels, leaving
companies with little capital. Carriers are postponing the purchase of the
equipment necessary to deploy competitive local and advanced services,
leaving the manufacturers to suffer the consequences.
As more manufacturers founder, we risk being left with too few
domestic providers of critical infrastructure for advanced services, a
significant threat to our national security. Finally, investors are questioning
whether communications continues to be a profitable industry in which to
risk capital.
I believe the prolonged uncertainty regarding such critical issues as
local competition and broadband may have aggravated existing market
troubles. Prolonged uncertainty can serve as a disincentive to invest in new
and upgraded facilities, as a barrier to entry for potential competitors, and as
a deterrent against modifying outdated business plans. Companies need to
know the rules of the road, and they need to be able to rely on them.
It is time to eliminate uncertainty and instability. We must make
the difficult policy choices and conclude these four proceedings. Our
decisions are vital to industry, to national security, and to the consumers
who ultimately will benefit from more competitive and advanced services.
Last May, I expressed my desire that the Commission take action on
these pending proceedings by the end of year. Given the potential
significance of our decisions on the economic conditions, I did not think that
was an unreasonable goal. Indeed, last November the Commission
committed to completing the Broadband proceedings by the end of this
year, and the D.C. Circuit has expressed their expectation that we complete
our Triennial Review this year, as well. I am disappointed that we will not
make it, but I am hopeful that we will act soon.
The Commission recently sought another extension of the D.C.
Circuit’s USTA decision mandate until February 20th, and I am beginning to
become concerned with whether we will be able to make that deadline. If
we are to meet that deadline, I believe we need to begin a more specific
dialogue with the public, and with affected industries in particular, regarding
the policy direction the FCC intends to take.
If I’m going to call for FCC action by the end of this year, however, I
too must be prepared to share what I am thinking on these critical issues.
Therefore, I offer the following thoughts in order to spur debate, respond to
my own deadline, and to help the Commission finish its deliberative process
and reach finality on these issues.
II. Principles for Decision-Making
I believe it is important for the Commission to begin with certain core
values and goals. Once we have articulated and prioritized these principles,
we can begin to evaluate concrete actions. Following are three principles
that I believe should govern our decision making.
First, the Commission should make its top priority new
investment and deployment of advanced network infrastructure. We
have a number of issues before us that are vital to the marketplace and need
timely resolution. Nevertheless, we must begin somewhere. I believe the
Commission should focus first on creating the right incentives for companies
to invest in and deploy advanced services.
Until we create a stable regulatory framework for deploying and
providing such services, our country’s communications network and services
will remain stagnant, not improving, not developing. The many people
without access to advanced services now, particularly consumers in rural
America, will remain without. And competition – the driver of innovation,
growth, and effective pricing – will remain minimal.
Even if we correct the incentives with respect to the provision of basic
telephony, and even if the market corrects its valuations of telecom carriers,
companies will not invest in advanced services until we ensure that the
governing regulations will not deprive companies of the ability to make a
return on their investment.
Second, the Commission must minimize further questions and
avoid creating greater uncertainty or prolonging ambiguity in this area.
After having already taken a year to review a set of issues and debate
various policy outcomes, we should resolve all of the issues, not just
definitions, but also the implications on wholesale obligations. To put off
the decisions that have the greatest impact on the marketplace to another day
will only aggravate current market conditions and prolong the angst and
uncertainty that surround the deployment of advanced services.
Third, the Commission must be responsive to the courts by
outlining a clear standard on the necessary and impair test while
remembering Congress’s goal of ensuring that the local markets are
truly open to competition. In so doing, we must address the court’s
criticism regarding our existing unbundling framework, while also ensuring
access to essential facilities.
Priority I: A Regulatory Environment that Encourages New
Investment
As you know, telecommunications has been responsible for much of
this nation’s economic growth during the past decade. The availability of
advanced telecommunications is essential to the economy in the 21st century,
dramatically reducing the costs of exchanging information, improving
efficiency and productivity, and allowing previously local businesses to
serve the world.
I am confident that spurring investment in the deployment of new
facilities and advanced network infrastructure will lead to a new period of
growth.
I believe that at the outset, there are three immediate steps the
Commission can take to speed that growth and ensure that all Americans
have greater access to advanced services.
1. Adjust TELRIC Pricing
First, we need to adjust the TELRIC pricing formula for all new
investment on a going forward basis.
In my view, the TELRIC pricing formula provides incumbent service
providers with an insufficient return on investment capital for new
infrastructure.
In a nutshell, the existing TELRIC formula fails to accurately measure
the true risk of capital investment under current economic conditions, and
creates an unnecessary barrier for the deployment of broadband facilities.
We also need to adjust the depreciation schedules within the TELRIC
formula to more adequately account for new investment. I believe that
greater flexibility in depreciation time frames will provide a greater
economic incentive for service providers to invest in and deploy new
network infrastructure.
We therefore should conclude in the Triennial Review proceeding that
we must adjust the TELRIC formula on a going forward basis to spur
deployment in new facilities and services.
2. Deregulate New “Fiber to the Home”
Secondly, I believe we also need to adopt the principles set forth in
recent proposals regarding the regulatory framework for new fiber
investment deployed to a customer premises.
Under these proposals, “fiber to the home” facilities would be relieved
from unbundling requirements and incumbents would be relieved of any
obligation to deploy copper facilities in new build situations where fiber to
the home is deployed. Incumbents also would have several options and
obligations with respect to the existing copper plant in new build situations.
In the recent DC Circuit decision overturning our unbundled network
element regime, the Court criticized the Commission for not fully taking into
account the ability of new entrants to invest in and deploy new network
infrastructure. I believe that it is not “necessary” for a competitor to have
access to a new fiber loop.
I believe that if incumbent service providers decide to build new fiber
local loops to a customer premise, they should be free of “old-style” legacy
rules. Legacy rules are ill-suited for new facilities and new services in the
supercharged IP and fiber broadband worlds of tomorrow.
3. Provide Regulatory Relief for Hybrid Facilities but
Ensure Continued Access
In my view, new entrants should only use incumbent facilities that are
truly necessary for new entrants to provide service. That does not mean that
we should allow incumbents to stop providing any elements overnight, and
we need to acknowledge the distinctions among what different competitors
may need to compete for small and medium-sized business or residential
customers.
We also ought to reexamine how our unbundling and/or pricing rules
apply to incumbent deployment of new facilities. For example, once we
have determined that a particular state’s market “is fully and irreversibly
open to competition,” how is access to yet-unbuilt new facilities at super
efficient prices necessary to enable a new entrant to compete, especially if
existing facilities or their equivalent capacity are maintained at current
prices?
I must give Tom Tauke of Verizon credit for this policy construct.
About a year and a half ago, shortly after I joined the Commission, I heard
Tom give a speech where he laid out the concept of “new rules for new
wires.”
I believe that the Commission should freeze the service capacity level
that must be made available on new or upgraded facilities to the service
capacity level provided by the ILEC prior to the new investment in a hybrid
facility. For example, under this approach competitors receiving access
capacity at 1.54 mbs per second using pre-existing ILEC facilities would be
able to continue to receive such access capacity at the same bit rate under
newly deployed hybrid facilities.
I believe that incumbents should be given the proper incentives to
push fiber deeper into their networks and closer to the American consumer.
And such an approach actually facilitates the deployment of electronic loop
provisioning which would solve many provisioning problems.
At the end of the day, ILECs should receive the benefits of making
investments in new infrastructure deployment, but competitors should
maintain the ability to receive access to end user customers at the service
capacity levels that they currently receive.
Priority II: Minimize Further Questions and Uncertainty
These are turbulent economic times for the telecom industry and the
economy as a whole. In such times, the Commission should be particularly
cognizant of the impact of its decisions and that it can contribute to market
stability by establishing a more stable and reliable regulatory environment.
Broad proceedings that remain pending for extended periods can contribute
to uncertainty. Protracted uncertainty can prolong financial difficulties.
Regulatory uncertainty and delay can function as entry barriers in and of
themselves, limiting investment and impeding deployment of new services.
Particularly given the current financial conditions, we should act
quickly on our major pending rulemakings, particularly as they relate to new
investment. Prompt decision making will provide greater certainty and
stability to the marketplace.
We should work to be faster and be more reliable in our decision
making. Prolonged proceedings with shifting rules ultimately serve no one’s
interest, regardless of the substantive outcome. It is time for the
Commission to take action not only on the UNE Triennial, but also on
performance measures and the broadband proceedings.
Much of the buzz that I hear from others on the potential outcome for
the Broadband proceeding is centered on deregulation of the retail offering
of broadband service. My sense, however, is that the question that most
parties want answered is how we will ultimately decide the wholesale or
input question. In other words, I think most people already assume that we
are going to treat Internet access as an information service. The question
that matters is the regulatory treatment of DSL and cable modem
transmission.
I recognize that the Commission itself may have contributed to the
continuing confusion on this issue as a result of our ambiguous and
somewhat contradictory statements in the Wireline Broadband Proceeding
and the Cable Modem Proceeding. In both of these items we attempted to
address the appropriate regulatory framework for broadband services.
In the Cable Modem Proceeding,
(1) we determined that cable modem high speed Internet access is
an information service;
(2) we decided that the Commission’s Computer II unbundling
obligations did not automatically apply to cable modem service;
and
(3) we sought comment on whether some form of access
obligations should ultimately be imposed on Cable Modem
service.
In other words, in the Cable Modem Proceeding we addressed the
definitional issue and left open the issue of whether we would impose
discretionary unbundling obligations.
In the Wireline Broadband Proceeding, the Commission tentatively
concluded that DSL high speed Internet access is an information service, and
we asked about the implications of the Computer Inquiry II obligations and
other unbundling obligations.
Some in and around the Commission have suggested that the
Commission should use the same process we set forth in the Cable Modem
proceeding in the Wireline Broadband proceeding.
In other words, they advocate that the Commission should address
only the definitional issues and leave undecided – until some time later next
year – whether and to what extent the unbundling obligations apply in the
Wireline context.
I’m very concerned about – and at this stage I would not support –
such an approach. We should be cognizant and clear on what the
implications of that suggested approach would be.
In the Cable Modem proceeding, inaction resulted in no regulation
being applied.
In the case of DSL, however, the impact of the current presumption
under the Commission’s decision is that unbundling obligations do apply.
Inaction by the Commission therefore leaves all of the unbundling
regulations firmly in place – and only applies them to one of the two
competitors.
Therefore, I see three potential courses of action:
We could treat DSL services similar to cable modem service.
In doing so, we would need to change our Computer II rules so that
incumbent providers would no longer be required to provide underlying
transmission services as retail service offerings. Providers nevertheless
would have the incentive to provide broadband transport to unaffiliated ISPs
on reasonable terms, because only by doing so could they maximize the
value of their investments. Such offerings would be made available on a
private carriage basis and not as unbundled tariffed offerings.
The Commission could, on an interim basis, guarantee ISPs access to
broadband transmission services in a nondiscriminatory manner.
Specifically, ILECs would be required to offer unaffiliated ISPs the same
transmission services that the ILEC offers to its own affiliates through
private carriage agreements. This nondiscrimination requirement could be
put in place for two or three years, but then sunset unless the FCC extends it
to all broadband providers.
Second, we could treat cable modem services similar to DSL services.
Under this alternative, the Commission could leave the Computer Inquiry
rules in place and apply them to all broadband providers with common
carrier status. In effect, the FCC would impose the same regulatory
framework on cable modem service that currently applies to wireline DSL
service.
As for the third option, I believe the only other logical alternative is to
classify wireline broadband as a telecommunications service, with the
accompanying nondiscrimination requirements, and to acknowledge that the
Commission was wrong when it declared cable modem service to be an
information service. Instead, the Commission could determine that cable
modem service is a cable service subject to the panoply of Title VI
regulations currently applicable to cable service providers, such as local
franchise obligations and service regulations.
At this stage, of the three options I have just outlined, I believe the
first option – treating DSL service similar to cable modem service – is the
better choice. I recognize, however, that there are merits to all three – I fail
to see any merits, however, in refusing to answer the underlying question.
Priority III: Responding to the Courts
As you know, the U.S. Court of Appeals for the DC Circuit has
remanded the Commission’s UNE Remand Order – the Commission’s most
recent effort to set out a list of network elements that incumbent local
exchange carriers must make available on an unbundled basis to competing
carriers.
The Court criticized the FCC’s unbundling requirement as being
overly broad. The Court found the FCC had failed to take into account the
competitive nature of particular geographic and customer markets. At the
end of the day, we need to develop an unbundling framework that can be
implemented at a more granular level and takes into account the unique
issues found in rural and underserved areas.
Provisioning Issues
First, as I have stated previously, in responding to the court, the
Commission cannot ignore and must address provisioning and “Hot Cut”
problems that new entrants have highlighted in the record in order to ensure
that impairment does not exist and to allow for access to the residential
market.
Switching
I believe the Commission can adopt a relatively simple and
straightforward test with regard to whether “unbundled local switching” is
necessary for the provision of competitive services to consumers.
If other alternative facilities based providers exist in a market and the
impairment associated with provisioning problems is addressed then
switching would not need to be provided.
In other words, (1) alternative facilities providers would be required to
use their own facilities, and (2) if a sufficient number of alternative
providers are present, the Commission would assume that a wholesale
market for switching is viable.
The unbundling obligations that reside in the Act, however, still
remain viable and serve a pro-competitive purpose. In my view, the
unbundling obligations are necessary and need to stay in place in those rural
and underserved areas that lack alternative facilities based service providers.
At the end of the day, however, we need to recognize that if we fix
existing provisioning problems that will allow competitors to easily migrate
customers from the ILEC to their own facilities, then we cannot continue to
require unbundling in markets where such competitive facilities exists.
Any shifts in regulatory direction, however, should be cushioned by
transitional measures and safeguards.
Several states have requested that they become more involved in our
impairment analysis.
In my view, much of the current talk about state preemption is
premature. I believe that the States are best positioned to make those highly
fact intensive and local determinations.
During my stay at the Commission, I have witnessed first hand the
role that the States have played in being helpful partners in our mutual goal
to implement the Act.
I believe that the States should be implementing our standard by
making the factual determination regarding the existence of alternative
facilities based providers and whether, and to what extent, impairment exists
with respect to the ability of new entrants to access the market.
Line Sharing
Besides addressing our unbundling framework, the DC Circuit’s
USTA decision also vacated the Commission’s Line Sharing Rules.
The Court stated that we failed to adequately take into account
alternative facility providers, specifically cable and satellite. No one denies`
that Cable is the dominant provider of residential high speed Internet access
services.
In my view, the Commission has no choice but to recognize this fact
as it decides whether incumbent DSL providers should be treated as
dominant carriers when they provide high speed Internet access services.
Therefore, I’m in favor of declaring the incumbents non-dominant in
the residential high-speed Internet Access market and not re-imposing our
Line Sharing obligations where a cable competitor exists for residential high
speed services.
III. Conclusion
In sharing with you this afternoon my vision of how the Commission
should proceed and what the future landscape should look like, I have
covered a lot of ground. I’d like to leave you with some parting thoughts.
In today’s marketplace, many residential consumers do have
competitive, facilities-based choices for broadband services. Where a
competing provider, such as cable, offers broadband service, our regulations
need to recognize this reality.
In the residential narrowband, or voice-centric world, however, less
facilities-based competition exists. And our regulations also need to reflect
that reality. That is why it is critical that we establish a framework, working
with the States, that evaluates the true extent of facilities-based competition
in markets throughout the country. We must not leave behind American
consumers that live in rural and underserved areas.
I am optimistic that if the Commission follows the steps I have just
outlined, we could develop a framework to encourage investment in new
infrastructure and that would ensure the availability of next generation
network technology for all consumers through out the nation.
By taking these steps, the Commission can establish a framework that
would result in an effective tiered capacity approach agnostic to the nature
of the service provider or the technology it is using, while still ensuring
access to competitive providers for consumers. This framework puts cable
operators and telephony providers on similar footing.
Both types of providers would have basic service obligations that
remain regulated. Cable operators would be required to continue to offer
basic cable; they would be subject to must carry obligations and basic tier
pricing. Incumbent local exchange carriers would continue to be subject to
unbundling and state supervision.
Access to capacity above that level, however, would be constrained
primarily by market forces. Both types of service providers would be
similarly situated with regard to how they provide broadband service. Both
would be free to innovate, deploy additional capacity, and offer service in a
completely unregulated tier.
As I have said, the Commission at some point must move from
deliberation to decision-making. I believe we are now at the crossroads
where the tough choices must be made. I recognize that I envision a very
different world that exists today. The proposal I have set forth is
provocative, and one with which everyone will not agree. Indeed, I will not
be surprised if there are aspects with which you agree, but you do so silently,
and points with which you disagree, and you do so loudly. But in the end, if
the Commission is to move forward, we must engage more directly and
specifically. I therefore welcome your reaction, criticism, and suggestions.
Your move.
Thank you for your time.
See Joint Application by SBC Communications Inc., Southwestern Bell Telephone Company, and
Southwestern Bell Communications Services, Inc. d/b/a Southwestern Bell Long Distance Pursuant to
Section 271 of the Telecommunications Act of 1996 to Provide In-Region, InterLATA Services in Arkansas
and Missouri, CC Docket No. 01-194, Memorandum Opinion and Order, 16 FCC Rcd 20719 at 20754
(2001).
See United States Telecom Ass'n v. Federal Communications Commission, 290 F.3d 415 (D.C. Cir. 2002).
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